In October, the average 30-year, fixed mortgage rate increased to 3.07 percent, its highest level since March. For context, the historical average of the 30-year, fixed mortgage rate dating back half a century is 7.8 percent, according to First American Chief Economist Mark Fleming. It has never been as low as in the last decade.
“The declining 30-year, fixed mortgage rate has been one of the most important driving forces of both purchase and refinance activity for the last 40 years,” Fleming said. “Holding income constant, when market mortgage rates are lower than the rate at the time of a borrower’s last purchase or refinance, the borrower can borrow the same amount for less.”
Mortgage rates are likely to continue rising, he said, as the Federal Reserve slows its bond buying, the economic recovery continues, and inflation remains elevated.
“Higher mortgage rates will mean consumer house-buying power, all else equal, will decline and it will cost a borrower more per month to buy their ‘same home,’ or refinance,” Fleming said.
Historically, when mortgage rates rise, existing-home sales don’t necessarily fall, he said. “Each rising-rate era is different. The housing market’s response in each rising-rate era depended on the reason why rates were rising,” he added.
The same resiliency cannot be said of refinance mortgage demand. In each rising-rate era, refinance applications fall. That’s not surprising, Fleming said, as the decision to refinance is typically a strictly financial one.
House prices are more resistant to rising mortgage rates. Apart from the 1994 rising-rate period, house prices have continued to rise when rates increased, he said.
“House price appreciation is resistant to rising mortgage rates primarily because most homesellers would rather withdraw from the market than sell at lower prices – a phenomenon we refer to as ‘downside sticky,’” Fleming said.
“It is not a foregone conclusion that rising rates will reduce sales or prices this time, but it is likely that refinances will suffer,” he concluded. “When it comes to purchase demand, one must consider what else is going on in the economy that influences buyers’ decisions. Context matters for purchase demand. The economy is improving, and millennials continue to age into their prime homebuying years in large numbers, so the context remains good for the housing market.”